Vendors see writing on the wall when it comes to low price acquisitions

Vendors are on edge and growing more nervous about the state of the federal acquisition environment. Blame sequestration. Blame the government shutdown. But the real culprit is LPTA — lowest price, technically acceptable — an approach to evaluating procurements that is changing the federal acquisition landscape.

And all signs point to agencies continuing to use this approach in the coming years to buy goods and services, thus forcing federal contractors to have no choice but to adjust.

“We have to accept lowest price may just be best value for the government customer,” said Lisa Dezzutti, president and CEO of Market Connections, during a briefing to industry on new research and a new survey of how LPTA is impacting the government market. “We have to pursue new and lower cost business models.”

Lowest price technically acceptable is not really a new concept when it comes to acquisition evaluations, but it has been gaining favor among agencies, specifically the Defense Department over the last few years. Through its Better Buying initiative, DoD has offered LPTA as one of several approaches to improve how they buy goods and services.

Now it seems civilian agencies are following suit. Centurion Research Solutions analyzed more than $27 billion in procurements and found the Veterans Affairs Department is the biggest user of LPTA among non-DoD agencies.

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Within DoD, the Army, Air Force and Navy use this concept the most.

Price is most important

Under LPTA, agencies focus on price more than anything else as long as the vendor meets the minimal requirements for the job.

This means that if a vendor comes in with an innovative approach to a problem, but it costs three times more than their competitor who comes in with a basic solution that is likely to be just as successful and costs much less, the government is likely to choose the cheaper solution.

For the last two decades, agencies have strived to use best value instead of low cost, where the idea is if the vendor is providing more and better services than required and it costs more, that’s acceptable.

Ray Whitehead, the vice president of business develop and strategic planning for General Dynamics IT, said LPTA has traditionally been used by the government for a specific set of products or services.

“My understanding of the intent of LPTA is to be used when you can absolutely define what’s being required…and the risk of contract performance failure is low,” he said. “Sometimes when you start getting into mission critical services, if that network goes down, that’s mission failure and that’s high risk. Should we really be procuring that service using an LPTA method?”

Market Connections and Centurion show that agencies are indeed expanding the types of products and services bought through this approach.

Best value not forgotten

Centurion found 56 percent of the contracts it reviewed calling for LPTA were for construction, facilities, operations and maintenance and housekeeping services, while 22 percent were for professional or IT services.

“We looked at the NAICS codes and the top three NAICs are transportation and warehousing, manufacturing and wholesale trade,” said Fritzi Serafin, Centurion’s vice president for research services. “The fourth ranking was professional, scientific and technical services, which does include IT services, and there were many opportunities but the values were not that high.”

Centurion also researched how often agencies are calling for best value in procurements. It found overwhelmingly, agencies still are using this term to describe how they want to buy products and services. Centurion found agencies used the term best value in $744.5 billion in acquisition actions.

Market Connections also conducted a survey of 375 industry executives and 360 federal acquisition professionals about LPTA. It found industry isn’t happy, but is dealing with the move to LPTA.

For example, 82 percent of the vendor respondents say they would bid on a contract that called for LPTA. And of those 82 percent, 61 percent say they would respond because there are fewer opportunities and fewer dollars available to win and therefore felt like they had to.

Another reason contractors are willing to bid on LPTA procurements is because incumbents are under more pressure to lower their costs than previously and there are more opportunities to win work from them.

Deb Alderson, president and CEO of Sotera Defense Solutions, said being an incumbent contractor today is more of a risk than before.

RFPs more competitive

Alderson said LPTA opens the door for more competition.

“I’m spending a lot of time, and I’m seeing a lot of what’s being done in industry, focusing on the basis of estimates. So it’s not just living off the backs of the people, which are important because this is a people industry,” she said. “You’ve gotta make sure you have competitive RAC rates and salaries, but really have to take a hard look at how many people does it really take to do this job.”

Alderson said she was part of recent acquisition that shows the pressure and challenges incumbents face.

“I was working with an organization, and it had a recompete coming up that had a run rate of $20 million. The customer loved the company. They bid it at $10 [million], which I think was pretty aggressive, and it was won at $5 [million by another company]. You are like ‘wow.’ I would never have anticipated that. It was all done with a basis of estimate. They felt they could do the job with fewer people, which I’m not sure and I would question that.”

The basis of estimate is a concept used by project managers, estimators and cost analysts to calculate the total cost of a project.

The survey also found 57 percent of the contractors who responded are worried that agencies are making decisions that are only based on price regardless of quality or ability to perform, and 32 percent say they are unable or have less of an opportunity to provide value-added solutions.

Low-price to remain popular

General Dynamics’ Whitehead said these challenges are especially true when LPTA is applied to professional services and IT services contracts.

“What we are seeing in a lot of RFPs we come across today — the IT and professional services that are being procured are really critical to the agency’s mission. Do you want to be buying those using an LPTA method that sacrifices or abandons any sort of shared cost savings, innovations or technology refresh over the cost of the contract?” Whitehead said. “If you look at some of these procurements, for example, cybersecurity, network modernization or business process operations, these are mission critical services, and agencies using an LPTA approach I think may be sacrificing a short term savings for exactly that long term delivery that really the agency is going to depend on to perform its mission. I think we have to be very careful.”

Despite those concerns from industry, many of which have been very vocal in expressing them to the government, 42 percent of the agency respondents say they will be using more LPTA in the next three years. Additionally, 79 percent of the federal respondents say they are very satisfied or somewhat satisfied with vendor performance under LPTA contracts, meaning they aren’t seeing the impact vendors believe will happen or is happening.

To deal with the expected use of LPTA, vendors say they will offer less innovative technologies, reduce their indirect rates and will have a greater reliance on junior-cheaper-staff.

Whitehead, Alderson and others also offered some recommendations for vendors to survive in this acquisition environment, including staying close to your customer and managing that relationship more aggressively and in different ways.

The experts also say vendors should consider removing the project manager and project team from the recompete bid in order to get a fresh set of eyes on the program in order to cut costs. They say contractors also should communicate with all parts of the company and agency to understand their needs and define what is technically acceptable.